By Echo Wang, Milana Vinn and Matt Tracy
NEW YORK, Feb 5 (Reuters) - Elon Musk used a common two-step merger process in SpaceX's purchase of xAI that had the dual benefit of avoiding the repayment of billions of dollars in debt while giving shareholders a tax advantage, according to people familiar with the transaction. It also protects SpaceX from any legal liability from xAI.
The deal, announced on Monday, creates a $1.25 trillion company with plans to go public later this year to help finance Musk's
ambitions to put data centers in space.
Instead of combining the two companies into one and fully integrating operations, Musk decided to retain xAI, which runs social media platform X and created the Grok chatbot, as a wholly owned subsidiary of SpaceX, said the people, who asked not to be named because the details of the deal have not been publicly released.
The approach, known in corporate M&A as a triangular merger, is a commonly used structure in public-company transactions designed to be tax-efficient and limit legal exposure, M&A attorneys say.
As a subsidiary, xAI's debt, legal liabilities and contracts remain separate from the corporate parent, allowing xAI to run its operations independently while helping to insulate SpaceX from any investigations and litigation X may face. The social media platform is under investigation in Europe over accusations that Grok disseminated sexualized deep-fake images of real women and children.
X said last month it had taken steps to "prevent the [@]Grok account on X globally from allowing the editing of images of real people in revealing clothing such as bikinis" and is "committed to making X a safe platform for everyone."
Said Gary Simon, a corporate attorney at law firm Hughes Hubbard & Reed: “In an acquisition where the target ends up as a subsidiary of the buyer, no prior liabilities of the target necessarily become liabilities of the parent." He added that "corporate insulation of stockholders from liability is a key reason" to acquire the new business through a subsidiary.
SpaceX and xAI did not respond to requests for comment.
TAX-FREE DEAL
Financially, the structure also made more sense.
The merger is structured as a tax-free reorganization, allowing xAI shareholders to defer taxes on the SpaceX shares they receive as part of the deal until they sell their stake. XAI was valued at $250 billion in the deal, with each xAI share converting into 0.1433 SpaceX share, Reuters previously reported.
The multi-step transaction, conducted through two intermediary companies set up in Nevada, allowed the satellite and rocket company to acquire xAI without triggering the smaller company's debt covenants, avoiding any requirement to repay bondholders at the time of the merger, the people said. Reuters could not determine how much total debt xAI had at the time of the merger. It inherited $12 billion from X when the artificial-intelligence company acquired the social media platform in 2025; the combined company took on at least another $5 billion of debt since then.
There is a chance that SpaceX may not have had to repay xAI's debt in a traditional merger since it would have likely met the technical qualifications of a "permitted holder." Acquisitions by permitted holders do not trigger a change-in-control in debt contracts.
NO CHANGE OF CONTROL
“The permitted holder definition includes the principal investor and its affiliates, which of course is Musk,” said Matt Woodruff, senior analyst at CreditSights. “That would presumably mean SpaceX is treated as an affiliate, so a change of control is not required.”
The structure, however, fully ensured the purchase would not constitute a change-of-control, shielding the companies from having to refinance xAI's debt while interest rates remain high, analysts said.
“There’s really no realistic possibility that this would trigger a default given the way it is structured,” Woodruff said.
Those bonds are already trading higher, thanks to SpaceX's stronger financial footing. XAI issued $3 billion in five-year bonds last summer that yield 12.5% and were trading at 107 cents on the dollar before the merger. They rose to 111 after Reuters first reported the deal last week and were trading at 113.5 on Wednesday.
The all-stock transaction was completed this week, valuing xAI at $250 billion and SpaceX at $1 trillion, in what is the biggest M&A transaction in history, according to LSEG data.
IPO PLANS UNAFFECTED
The deal is not expected to significantly slow the timing of SpaceX's highly anticipated stock market debut later this year, if at all.
SpaceX CFO Bret Johnsen made no mention of it when he invited some of Wall Street's top bankers to the company's sprawling corporate campus in Hawthorne, California last month, according to five people familiar with the meetings. SpaceX's most recent financials led some banks to estimate that the company could raise more than $50 billion at a valuation exceeding $1.5 trillion, Reuters previously reported.
Johnsen and SpaceX's investor relations team briefed bankers on what is expected to be the world’s largest IPO, potentially timed around Musk's 55th birthday on June 28, the people said. Executives from major Wall Street banks were there to pitch ideas on how to steer the company through the next steps, three people familiar with the meetings said.
The company told them some of the winners of the so-called bakeoff would be picked this month, said two of the people, who asked not to be named to discuss the private meeting.
Large acquisitions ahead of an IPO can sometimes trigger extra accounting and regulatory hurdles, particularly if the acquired business is deemed “significant” under U.S. securities rules.
SIGNIFICANT SUBSIDIARY
However, securities lawyers said the merger might avoid that if xAI falls below the Securities and Exchange Commission’s 20% significance threshold, based on measures such as assets or income, which would reduce the risk of delays.
"If it doesn't meet the 'significant subsidiary' test, SpaceX generally would not have to include xAI's financials in its IPO filings with the SEC," said Simon, the corporate attorney at Hughes Hubbard & Reed.
Some investors remain wary of any added complexity this close to an IPO. SpaceX's operations already include rocket launches, satellite broadband through Starlink, and U.S. defense contracts. Folding in a generative AI business and a social media platform — which Musk has also said he wants to expand into financial services — could add complexity to the valuation of the company.
"How would you value a company like that (when) there is no competition?" said Justus Parmar, CEO of Fortuna Investments, a venture capital firm that has equity in SpaceX, calling the new combined company a "conglomerate."
Yet Parmar said many investors are willing to look past those challenges because of Musk himself.
"People are very willing to buy in to his (Musk's) future", said Parmar, "(and) his execution abilities are obviously world-class. That alone is going to obviously give a lot of buy-in to the vertical integration of this conglomerate."
(Reporting by Echo Wang and Milana Vinn in New York, Matt Tracy and Joey Roulette in Washington, and Krystal Hu in San Francisco; Editing by Dawn Kopecki and Matthew Lewis)
